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Canada Growth Rose 3.7% in First Quarter, Tops in G7--Update

OTTAWA – Canadian economic output advanced at a robust pace in the first quarter, making Canada the best-performing economy among Group of Seven countries in early 2017 on the strength of consumer spending and a long-awaited rebound in business investment.

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Growth in the first quarter, while strong, fell short of bullish market expectations, but largely in line with the Bank of Canada's forecast. Regardless, it will reinforce a belief that Canada's economy is on a roll and has entered a new stage after shaking off the negative fallout from lower commodity prices.

Canada's gross domestic product, or the broadest measure of goods and services produced in an economy, rose at a 3.7% annualized rate in the first quarter, to C$1.81 trillion ($1.35 trillion), Statistics Canada said Wednesday. Market expectations were for a 4.2% advance, according to economists at Royal Bank of Canada.

The economy got a boost from business investment, which has faltered amid the swoon in commodity prices that began in earnest in mid-2014. Capital spending by firms rose 2.9% on a nonannualized basis in the first quarter, or the biggest gain since the start of the decade. Central bank officials are closely watching capital-spending data for signs that the economy is close to reaching full potential.

"These are big gains in business investment and they are a long time coming given the underperformance during the oil-price shock," said Eric Lascelles, chief economist at RBC Global Asset Management. He added leading indicators remain strong in Canada and "this is an economy that's genuinely moving well."

GDP also got a boost from household spending, up 1.1%, and a C$12.25 billion buildup in business inventories, or the largest such accumulation in stockpiles in over a dozen years. A rise in inventories could signal that firms anticipate greater demand for their products.

The Bank of Canada has adopted a more upbeat tone about the outlook and expected a "very strong" first-quarter result, but remains cautious given a number of uncertainties the economy faces, chief among them changes in U.S. trade policy, and relatively tame inflation.

On a month-over-month basis, economic output in March rose a solid 0.5% after no growth in the previous month. The gain was well above market expectations for a 0.2% advance, and powered by activity in manufacturing, and retail and wholesale trade.

This 3.7% annualized gain in the January-to-March period marks the third straight quarter of strong growth for the Canadian economy, after output shrank 1.4% in the second quarter last year as wildfires in western Canada curtailed or forced the shut down of energy production. Canada's growth in the first quarter was by far the best among G-7 economies, with only Germany coming closest at 2.4% expansion. The U.S. economy grew at a 1.2% annualized rate, according to the most recent estimate.

The data agency also revised growth upward for 2016, saying the economy advanced 1.5% versus the early estimate of a 1.4% rise. Forecasters have Canada growing 2.6% in 2017.

The surge in first-quarter expansion means Canada has shifted from being a laggard among major industrialized economies, as it struggled under lower commodity prices, to emerging as a growth leader. Economists and officials at the central bank expect economic activity to moderate in the current quarter, and post growth of 2.6% this year.

"The economy is firming, and it's managed to deal with the shocks it has had to absorb," said Ted Mallett, chief economist at the Canadian Federation of Independent Business, a small-business lobby. A gauge of small-business optimism hit a 30-month high in April, and intentions on hiring and business investment have reached what Mr. Mallett called "normal" levels.

Some market watchers urged caution, though. Global confidence in Canada is lukewarm, judging by lackluster returns on Canadian equities and continued weakness in the Canadian dollar, said Frances Donald, economist at Manulife Asset Management. This has much to do, she said, with concerns related to trade policy as the Trump administration seeks changes to the North American Free-Trade Agreement; uncertainty related to commodity prices; and the state of the country's housing market.

"Until there is a pronounced lifting of uncertainties, Canadian fundamentals will continue to take a back-seat to other, more powerful drivers of sentiment," she said.